Smiles all around: FX joint calibration in a multi-Heston model

TL;DR

This paper presents a new multi-factor Heston model for FX markets that accurately fits multi-dimensional vanilla options, maintains analytical tractability, and respects currency symmetries, with robust calibration results.

Contribution

The paper introduces a novel multi-factor Heston model that captures FX market features while preserving symmetries and analytical tractability, with demonstrated calibration robustness.

Findings

Successfully calibrates to real market data

Maintains symmetry properties across currencies

Shows robustness in in- and out-of-sample tests

Abstract

We introduce a novel multi-factor Heston-based stochastic volatility model, which is able to reproduce consistently typical multi-dimensional FX vanilla markets, while retaining the (semi)-analytical tractability typical of affine models and relying on a reasonable number of parameters. A successful joint calibration to real market data is presented together with various in- and out-of-sample calibration exercises to highlight the robustness of the parameters estimation. The proposed model preserves the natural inversion and triangulation symmetries of FX spot rates and its functional form, irrespective of choice of the risk-free currency. That is, all currencies are treated in the same way.